- The "jock tax" can trip up many players
- Endorsement income gets split depending on where it was earned
- Athletes (and others) consider no-income-tax states for residency
Sergio Garcia, winner of this year's Master's tournament, had a problem.
The IRS once claimed the pro golfer owed more than $1.7 million for misrepresenting income he earned a number of years ago as a celebrity rep for apparel colossus TaylorMade.
While Garcia largely prevailed in Tax Court in 2013, his scuffle with the tax collection agency underscores the risks athletes face at tax time.
When it comes to deductions, paying attention to details is key. That's even more important for pro athletes because of their often-complicated categorizing of various kinds of income. They also make a lot more money than most of us.
If you figure many pro athletes earn more than a million dollars a year, they have a higher likelihood of getting audited, said Jonathan Miller, president of Sports Financial Advisors Association, a non-profit that educates and shares best practices with financial managers who work with professional athletes.
IRS figures back that up. Of nearly 1.2 million individuals whose returns were audited last year, 34 percent reported adjusted gross incomes above $1 million for 2015. By comparison, only 9.2 percent of returns were audited for those earning below $1 million.
And while staff cuts at the IRS could reduce the risk of getting audited in the future, "the fact that there are less staff may mean they leave the little guys alone and they're only going to go after the big guys," Miller said. "So it may actually increase the likelihood that a wealthier individual will get audited."
Major league players, like those on baseball and football teams, are paid regular W-2 wages and are subject to the same tax rules as anyone else. Those who don't play for a team, such as golfers and tennis players, often set up a corporation through which they receive income from tournaments and endorsements.
Where it can get tricky for all pro athletes is the volume and variety of deductions they have to track, including those for expenses related to multiple residences, travel, meals and entertainment, equipment, health club memberships, training and agents' and business management fees.
One of the thorniest issues is what is known as the duty day calculation, also dubbed the "jock tax" - the portion of a player's W-2 wages earned in any of the 43 states where income is taxed and in which they have trained or played games. Athletes must also calculate deductions for expenses associated with duty days in each jurisdiction.
"Most of the time, the way the leagues have set up their payroll is pre-negotiated state-by-state, so the players don't really have to do anything other than get their W-2," Miller said.
While teams have improved their tracking "at least once a year we find inaccuracies in some of the duty days and we're able to save players substantial amounts of money," said Joe Geier, founder and president of Winpoint Financial, in Marriottsville, Maryland, which manages baseball players such as former New York Yankee Mark Teixeira.
Endorsement income also gets allocated according to where it was earned. A tennis player, for example, who is sponsored by Dunlop needs to document the number of days he wore a Dunlop cap at an appearance in a given state.
"You'd also get to allocate a certain portion of your expenses against that, so if you plan appropriately, you can minimize some of the state tax liability," Miller said.
In addition, many states have become more aggressive about going after players and their teams for taxes. They see the millions teams are earning at a time when state coffers have been depleted.
Players can minimize their duty day calculation by residing in one of the seven states that have no income tax, including Florida, Texas, Nevada and Washington. That's because half of that calculation is automatically assigned to their state of residency. Winpoint urges new players to begin tax planning two to three months before they're drafted.
If you do that far enough in advance, you can substantiate that residency decision a lot better, Geier said.
"Once a player's been drafted or once he's received a signing bonus, it's next to impossible to go back and set up residency in a state that doesn't have income taxes. That's in essence fraud because you really didn't do it the proper way." Geier said.